May 23, 2013

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Above the Line Deductions-Lower your Overall Tax Bill

May 14, 2013 By

Above the line deductions bring down your taxable income, which brings down your taxes. These deductions include alimony, expenses related to work, student loan interests, health insurance deductions for the self-employed, retirement contributions, and bank charges on early withdrawals from saving accounts.

These deductions are officially referred to as adjustment to one’s income; but they are commonly called deductions because they are deducted from your earnings to arrive at the final Adjusted Gross Income.  These deductions are optional, but claiming them goes a long way in reducing your taxable income.

On the IRS Form 1040, three main deductions are included.  These deductions include educator expenses, business expenses, and health savings account deductions.

Educator Expenses Deduction: This gives teachers the opportunity to have the amount spent on classroom supplies to go untaxed. This deduction also includes repayment of student’s loans. It is possible to claim up to $250 of the educator expenses. These are untaxed funds that eligible taxpayers, mostly educators, can claim.

Business Expense Deductions: This does not cover all business expenses but applies to some.  On the Schedule A, it appears as a miscellaneous deduction and not necessarily as a business expense.  It can be claimed by filling either the IRS Form 2106-EZ or the IRS Form 2106.  Both forms are available online and can be filled online too. This deduction does not carter for all taxpayers, but for a selected few including performing artists, military reservist, and fee-basis government officials. 

Health Savings Account Deduction: This is like a health insurance policy where those that participate therein are allowed to put aside some money which is tax-free, for medical bills.  It functions in the same fashion as a retirement fund.

Generally, the above the line deductions have a positive effect on taxpayers as they give funds that are tax exempted.  However, there also are deductions below the line; whatever deduction that follows below the gross income are taxable. If there is a deduction of $1,000 above the line, it gives you $1,000 tax exempted income, which reduces your gross taxable income.

The above line deductions can easily be claimed directly on the IRS Form 1040; the taxpayer doesn’t have to go through the hassle of filling out a Schedule A. The secret to claiming deductions is to understand how they work; this will go a long way in lowering your tax bill.

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Planning to Run Away From High Tax States?

May 7, 2013 By

Tax payment is not an option, but an obligation. Other than Federal taxes, you must be ready to pay state taxes accordingly. Is your state income tax too high? If you are considering relocating from a state where taxation is high like California, Connecticut, or New York, to other taxpayer-friendly states, it is important to understand that it is not easy to trick some tax officials.

The tax departments of high tax states always keep track of emigrations, especially when the person is expecting a huge income. It is not very easy to sneak through their eyes and enjoy your wealth in a different state after earning the income.

The tax officials will consider you to be a resident or non resident based on a number of factors, like your place of residence. The place of residence may be determined based on various factors. While some third party sources may tell the tax officials about your residence, there are other important factors you must understand:

·         How long have you been living in the state?

·         In which city do you work or run a business?

·         Where does your family live?

·         What is your primary residence?

·         Have you made any investments and real properties?

·         Where have you been filing tax returns and claiming tax emption?

·         Is your residential contact number registered on the state directories?

·         Which city do the children attend school?

·         Are the churches, social and country clubs and professional associations you visit in the same city?

·         Which state issued the driver’s license?

·         Which state are your vehicles registered in?

·         In which state are the professional licenses and permits maintained?

·         In which state is your electoral registration made?

·         In which states do you have bank accounts?

·         Where do you consult a doctor, accountants, or attorneys?

If you are deemed to be a non resident in the state, then the income will be treated as belonging to a non resident, and you may be exempted from paying heavy taxes. But in some cases, you may still have to pay taxes to the former state. If you have employees working in high tax states even though their residence is elsewhere, you still have to pay taxes to that state.

It is hard to escape the heavy taxes levied by the high tax states as one of the other connections tend to bind you to them, and may make you vulnerable to pay the taxes. You can seek expert advice that will safely take you away from the clutches of tax officials, especially when you have huge investments at stake. Being vigilant and strategizing is important to prevent or resolve any disputes that might arise for the payment of taxes. Note that tax payment is paramount and non-compliance may land you in trouble with the state tax agencies. Hopping from one state to another may help you save a few extra bucks, but think about other factors before you decide to move.

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Various Ways to Pay Your Tax Debt with the IRS

May 2, 2013 By

Every eligible taxpayer is expected to pay taxes and file tax returns annually. You might be facing a mountain of financial challenges, which is understandable. However, Uncle Sam expects you to abide by the law and pay; but if you cannot clear your tax debt by the due date, there are other legally viable options you can resort to.

Typically, the IRS is supposed to collect taxes due within 10 years from the date of filing tax returns. Upon negotiation, the IRS may structure the payment amounts in a way you can pay off within the collection period. If you choose to ignore the tax obligations, the IRS has all the rights to move in on your assets and recover the tax amount owed. IRS officials may slap a lien on your house, freeze the bank accounts, seize tax refunds which you were otherwise eligible to, or even garnish your wages.

All you have to do is to plan your tax payments well and you will never have to worry about any aggressive IRS collections methods. 

The determination of the tax amount outstanding is the first thing you should do, since payment options vary based on the amount. Also, if you want to save yourself from a lien, ensure that the tax due does not exceed $10,000. If you have an untainted tax-compliance history, the IRS may relax the amount to be paid immediately and accept any proposed tax payment plan.

Offer-In-Compromise: This is an agreement between IRS and the tax payer to settle the tax debt at a lower amount than what is actually owed. This will however, depend on the debt amount and your income. The IRS scrutinizes your ability to pay, income, expenses, assets equity, amongst other factors before approving any OIC applications. You will be required to fill the IRS Form 433-A and Form 656 plus a $150 non refundable fee.

Credit card payment: The IRS penalties and interests are pretty high compared to some credit card rates. To evade paying nominal interests on your tax debt, the credit card payment might be ideal. Find out the rates from your credit card company and weigh the two options.

Grab A Fresh Start: The IRS is always coming up with a variety of options to enable as many taxpayers as possible to pay their taxes. The Fresh Start Program is available for taxpayers who owe less than $50,000 and your fail-to-file penalty can be waived up to six months by filing the IRS Form 1127-A

Installment Agreement Online: If you owe less than $25,000 and have up-to-date tax returns filed, then online payment agreement is a great solution. You can decide how much to pay per installment if you owe less than $25,000. However, if it exceeds $25,000, you will have to apply by filling a form 433-F to work out an Installment Agreement payment arrangement.

Installment Agreement For Large Balance Due: In case the tax due exceeds $50,000, you will have to apply for an Installment Agreement by filling the form 9465-FS and form 433-F plus the collection statement and sending them to the IRS via mail. Your financial information will be reviewed before the IRS approves your application. Upon approval, you may have to pay a fee that is totalled up based on the income, and the type of plan you may qualify.

Important Tips

That tax code is complicated, and most of the provisions contained may be confusing. It is for this reason that you might want to consider help from a professional, CPA, tax attorney, or enrolled agent who can negotiate with the IRS on your behalf. You must also keep up to date with changes in your life that might affect your taxes and proper estimation of your taxes; use the IRS Form 1040-ES for this.

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IRS Whistleblowers Cashing In

April 19, 2013 By

Uncle Sam is not faint hearted in taking what is deemed rightfully his. Not all taxpayers comply with tax rules and prefer dodging the IRS while other law abiding citizens pay up dutifully. Some tax defaulters are wealthier than an average American taxpayer, and you may even know them. Why not help the IRS corner such individuals and get paid while doing it?

You don’t have to be a trained FBI agent to bust a tax cheat. Just gather some basic information and submit it to the government through its IRS Criminal Investigation unit, then sit back. The tax cheat will soon be forced to pay his fair share of taxes as you cash your paycheck with a 15% bounty of the successful tax amount recovered.

This all sounds like an easy money-making plot. However, this is not an excuse to start digging up secrets on a rich relative or a boss you never liked. The IRS stresses that you act within the law to avoid legal pitfalls.

The process of IRS’s investigation could take as long as 2 years, but do not be agitated in waiting because patience pays in the end. In many cases in the past, whistleblowers were known to walk away with millions in cash.

How do you do it?

Your journey to the 15% bounty starts with just a call to the IRS asking for Application for Reward for Original Information (Form 211).   Correctly fill in your details and send the form to any IRS’ Claim Examiner stationed closest to you. It’s imperative to note that the information you provide to IRS investigators does not automatically qualify you for the 15% reward. Many applications are received by IRS offices and priority is given to those that promise substantial recoveries.

Criteria for Informant’s Information Reward

  • Information that is specific and becomes relevant in IRS’ investigation and recovery procedure guarantees you 15%.
  • Information that only provides a lead but not specific on how the investigation is conducted to determine tax liability gives you only 10% reward.
  • You just get 1% reward for the faintest tip off that leads to a successful determination of tax liabilities

The secret to the 15% reward is by providing sufficient information about those whom you suspect to be dodging IRS; you will even do more good to your case and also facilitating the work of the IRS by availing any proof that you have to the effect.

Restrictions

Current and former IRS employees are barred from participating in this interesting activity. It can even become worse if you filled Form 211, but it comes back to haunt you if you were at all, involved in the tax-evasion scheme.

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Paying Your Business Expenses Using another Person’s Credit Cards

April 10, 2013 By

Today’s turbulent economy makes it hard to properly manage finances and maintain a good credit score. The recession is lasting longer than most people had expected, jobs are being lost and the few dollars that get into our pockets tend to disappear even before you are done paying your bills; you may end up broke before the middle of the month. Since life has to move on, you may resort to borrowing. If you cannot find hard cash from family and friends, then you might want to borrow their credit card to either clear outstanding debts or pay your bills.

Using another person’s card to pay your own bills is comparable to asking a family member or friend to co-sign a loan for you. If you are lucky enough to get somebody ready to share a credit card, don’t get so excited and spend more than you can actually afford. This is abusing the kindness and you risk battering your friend’s credit score as well.

Managing an IRS Tax Audit with another Person’s Credit

Financial hardship is likely to result in a tax audit as a result of nonpayment of taxes. With proper planning and record keeping, you can survive a tax audit when it finally strikes. Arm yourself with the following;

1. You must have a copy of each credit card statement received as well as charge slips of the business costs you intend to deduct. This is especially important if the slips comprise an itemized list of things you have bought.

2. You must keep proof that the statement was indeed, paid for. If you are using a borrowed credit card and don’t have your own bank account, the only viable option would be to use money order but it has to show that you are the buyer of the order and show the source of the funds that purchased it.

3. Preferably, pay directly to the credit card company as opposed to your friend (the card owner). This is because strange deposits are normally scrutinized and questioned by the IRS and proving that the deposits don’t qualify for income shouldn’t be so hard.

4. Don’t forget that the card is not yours and therefore, it may not be possible to deduct all the appearing charges, even though you made the purchase. If you are paying a fraction of the due balance, just indicate what is covered by your payment. Don’t round off the figure like $500 if the total amount is $497.45; just pay the total of exclusive cost.

5. Back up your claims with a letter from your business partner or friend whose card you used to make purchase clearly stating that you were granted the permission to use it and therefore, will as well make the necessary payments

6. Don’t forget to ask your friend not to use similar costs on his or her tax return.

The toughest task of any tax audit is to find another person’s credit card records for previous years. You can be audited two or three years after filing and by this time, your partner or friend might have passed on, gotten divorced, or even relocated to another state or even worse, you might not be in good terms at that time.

The best way to safeguard yourself from problems with the IRS is to keep tax records as you obtain them, categorize them, and if Uncle Sam comes knocking with an audit, you can proudly produce them confidently to the IRS agent.

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Tax Withholding, Refunds and the Frequent Changes

April 9, 2013 By

Paying taxes can be painful, but if you receive a tax refund in the end, it doesn’t hurt as much. Some people use refunds as an alternative way to save. As you work on your tax returns, it is important to scrutinize your estimated taxes, tax withholding, or both. Did you over-pay your taxes the previous year and looking forward to a refund? Well, you might want to make some adjustments to your returns this year if you want that money in your pocket throughout the year instead of in the form of a refund check. Such savings can be used to clear or at least lower your credit card debt, pay up your student loan, or even throw a party to celebrate a life event-it is your money and the way you spend it is entirely your business.

Unlike your bank account savings that fetch interests, don’t expect the same from the Treasury department on routine refunds. What does that mean? If you normally receive huge refunds from Uncle Sam every year, you are literally giving the federal government an interest-free loan of your money. You think it is unfair? Well consider this: the IRS doesn’t “apply” for the money;  you volunteer it by overestimating and overpaying your taxes. Don’t worry, you are not alone; according to the IRS, over 110 million income tax refunds amounting to $309.6 billion were paid last year. This is approximately $2,803 per refund on average-this is quite a sum.

You can only plan your cash and taxes appropriately by carefully reviewing your withholding and projected taxes, especially if your tax liability is not completely covered by payroll withholdings. This is especially important if you have any other income not subjected to withholdings like income from investments, partnerships, self-employment, or a side job.

With the unpredictable nature of tax laws that are frequently altered, this might be a bit complicated to most taxpayers. You should therefore, consult a tax expert if anything is unclear, use some software like Turbo Tax, or use the IRS free Tax Withholding Calculator on their site. The free Withholding Calculator can also be used by employers seeking to give their staff new W-4, Employee’s Withholding Allowance Certificate, so as to avoid withholding too little or too much from the paycheck.

It is important to bear in mind that most tax numbers, like standard deductions amounts, keep changing every year to factor in inflation. Close to two thirds of all taxpayers opt for standard deduction as opposed to itemized deductions every year. One of the most recent changes is the 2013 personal exemption amount that has been increased from $3,800 in 2012 to $3,900.

It is possible and very likely that you will miss most of these tax changes and the only way to avoid this mistake is to constantly visit the IRS website for updates or talk to your tax pro to be updated.

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Tax Consequences of Forgiven “Phantom” Tax Debts

April 2, 2013 By

Many people are forced into borrowing to foot their pressing bills and expenses. Resources are scarce, but needs are always on the rise. A debt of whatever nature can be a terrible burden, unless you are able to receive a notification that your lender has forgiven the amount you owed. That can sound like music to one’s ears, but what if the loan in question is nonexistent, assuming it was disposed of via a bankruptcy?

Such bank notifications alert the IRS that a taxable debt has been forgiven. Before you even thank the lender for the charitable deed, you must understand that the IRS considers forgiven tax debts as a form of taxable income to the debtor. Some loans are however, exempt under the Mortgage Forgiveness Debt Relief Act that was passed in 2007. According to this act, when the loan is restructured by the lender or the asset goes into foreclosure, the fraction of the mortgage that is either fully or partly forgiven is exempted from taxation.

However, some banks only forgive debts that have already been discharged. In an arrangement between the government and the country’s top banks and financial institutions, lenders agreed to settle claims worth $25 billion. In return, the government offered to give the said banks and financial institutions credits against the amount they offered to pay.

The banks sprung into action and earnestly wrote off old loan amounts. For former customers, the financial benevolence doesn’t mean much, because the debts have since been discharged and they no longer owe the amounts being “forgiven.” However, the bank’s perceived forgiveness still implies that the phantom debts have been discharged and former debtors have received taxable income, and the IRS will want its share. It is hence, the responsibility of the affected individuals to clarify to the IRS why they don’t owe any taxes on debts they don’t owe in the first place.

Most banks were drawn into the loan forgiveness arrangement because of the promised credits from the federal government. Furthermore, most of these financial institutions were a bit sketchy on the reasons why they didn’t send customized letters or notifications to the target borrowers instead of the general notifications that were sent. The IRS relies on these notifications and taxpayers who are notified about the forgiven debts should brace themselves to deal with any possible tax consequences.

If you receive a notification about a forgiven debt that never was from your bank, be quick to clarify this issue with IRS before they try one of those smart collection moves. You don’t have to thank the lender and the bank after all.

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More Flexible Offer-in-Compromise Terms with the Fresh Start Initiative

March 27, 2013 By

The Offer in Compromise (OIC) is an agreement between the IRS and a taxpayer that lets him or her settle an IRS tax debt for less than the actual liability owed. Interested and eligible taxpayers are allowed to put in an OIC application, which is only approved and granted by the IRS upon confirmation of the applicant’s inability to pay the full amount either in lump sum or via a payment agreement. OIC applications are approved upon thorough review of the taxpayer’s assets and income to determine the most sensible collection prospects.

In its commitment to make tax debt repayment much easier and flexible, the IRS introduced what it dubbed the “Fresh Start” initiative that expanded the Offer in Compromise program. More flexible terms were introduced in this initiative making it possible for financially strained taxpayers to pay up their tax dues adjustably and efficiently.

The following are some of the notable changes;

·         The calculation of a taxpayer’s prospective income was revised. As opposed to the original OIC that required the IRS to review four years of future income if the tax debts were to be paid in five or less months, only one year is currently reviewed. For offers to be cleared in two years (24 months) the number of years to review prospective income were chopped from five to only two. Please note that the maximum allowable duration for paying off tax debts with an OIC is 24 months.

·         Taxpayers can repay their minimum student loans guaranteed by Uncle Sam for their post-high school education. This provision requires that you provide proof of payment to the IRS.

·         Taxpayers are also allowed to pay state as well as local delinquent taxes. This means that if you owe both state and local delinquent taxes, and cannot fully pay them, you can be allowed to negotiate monthly payments to state tax authorities in some cases.  

·         The standard Allowable Living Expense allowance was also expanded to incorporate average expenses for essential needs for citizens residing in the same geographic locations. The set standards are usually used to evaluate and establish installment agreements and Offers in Compromise applications. With the expanded National Standard miscellaneous allowance, taxpayers can now cover some costs like bank charges and credit card payments.

You can find more information on the “Fresh Start” initiative by visiting the IRS website. Read the IRS Form 656-Offer in Compromise and the IRS Form 656-B-Offer in Compromise Booklet. Alternatively, call the IRS or talk to a tax professional.

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Settle for Less with an IRS Offer in Compromise

March 1, 2013 By

The IRS Fresh Start program diluted most strict requirements that used to bar many deserving taxpayers from qualifying and taking advantage of the IRS Offer in Compromise tax relief. However, the whole OIC process still remains a bit complicated for most taxpayers and a good number of applications don’t meet the requirements.

The IRS uses a uniform formula to establish how much is owed; assets (less securing liabilities) plus disposable income after permissible expense times twelve (for immediate payments) or twenty four (for installment payments). An OIC is only approved after serious scrutiny of the taxpayer’s real worth as well as financial hardship.

If you have money in your retirement plan, you will be expected by the IRS to withdraw and include it as part of the offer you make. Assuming that you have $40,000, and your retirement plan has $40,000, the IRS will not agree to an OIC because you can afford to clear your tax debt.

The equity of your assets will be examined and considered by the IRS before finally establishing how much it is willing to accept. In the past, homeowners would just forget about an Offer in Compromise, as they were expected to pull out enough equity to meet their tax burden. This has since changed, and owning a home shouldn’t dissuade you from applying for an OIC, especially if the mortgage is more than the home’s value. 

Your clothing and cheap household objects will not be treated by the IRS as assets. However, art work, collectibles, and other valuables that can be sold will be taken into account. The IRS expects you to sell the valuables and settle the debt, unless it is secured by a loan. But still, the IRS will be interested in quick sale value of the asset and the loan balance.

What about your car? Don’t worry, the IRS understands how much your car means to you, and you can still drive it to work in your efforts to generate more tax revenue, especially if you have a loan on it. But even if there is no lender, the value of the car will be immensely discounted when establishing an acceptable offer. Also not acknowledged, are monthly credit card payments.

It is also important to check out the set standards for housing and utilities, vehicle, and household costs. This information is available on the IRS website. The chances of qualifying for an OIC dwindle if you spend more in housing and utilities that the national standard for housing in your area of residence. You should cut these expenses to be in line with the national standards or even relocate to a cheaper area unless you are compelled to stay in your current residence because of circumstances like disability.

Other factors that the IRS looks into include age, health, earning potential, dependent’s health, and the statute of limitations on the current liability. If your application is rejected, you might want to consider applying as Currently Not Collectible and use this period to plan your tax payment.

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Six Great Ways to Pay Your Late Taxes

February 27, 2013 By

Taxpayers who owe taxes can use a number of options to clear their tax dues. If you owe Uncle Sam, here are some important tax payment tips for you:

1. Pay Your Tax Bills: Whenever you receive an IRS tax bill indicating that you owe late taxes, it is expected of you to clear all the owed taxes, plus the resulting interests and penalties. If you are financially strained and can’t pay the due amount, consider getting a loan to clear this bill. This is mainly because a loan from a financial institution fetches much lower interests compared to IRS penalties and interests.

2. EFT: The IRS supports various tax payment methods, including the electronic funds transfer, money orders, checks, cash and even cashier’s checks. Electronic funds transfer is however, the fastest and most efficient. Use the Electronic Federal Tax Payment System to pay your late taxes.

3. Credit Cards: You can use your credit card to clear your tax bill. Unlike the IRS interests and penalties, credit cards rates are much lower. Some of the companies that support this mode of payment include Link2Gov Corporation, WorldPay US Inc, Official Payments Corporation, amongst others.

4. Apply for an Extension: You can request the IRS to extend the tax payment period via the Online Payment Agreement on the IRS website. Use this time to plan your tax payment.

5. Installment Agreement Plan: If you cannot pay the whole tax bill owed at ago, you may want to enter into an Installment Agreement plan with the IRS. With such plans, you agree to make a monthly payment. However, you can only qualify by filing all necessary tax returns and be up to date with the estimated tax payments. Use the IRS Form 9465, Installment Agreement Request or an online payment agreement if you owe $50,000 or less cumulatively in taxes, interests and penalties. Use Form 433F if you owe more than $50,000. Note that you may have to pay a one-time user fee.

6. Offer in Compromise: This allows taxpayers to clear their tax debts for less than the whole amount owed. The IRS scrutinizes every application carefully before approving, especially the finances of the applicants. It was however, expanded to benefit more taxpayers with the fresh start program, but still, you must prove your financial hardship beyond reasonable doubt for your application to get the IRS approval.

The bottom line is; make certain that you clear your tax debt in time as any delay may result in the accumulation of IRS penalties and interests.

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